Vale earnings fall on sliding iron-ore prices

PaulKiernan

RIO DE JANEIRO--Brazilian mining giant Vale SA reported its lowest quarterly sales in four years Wednesday after slowing economic growth in China brought a sharp drop to iron-ore prices during the first three months of 2014.

Vale, one of the world's top three miners and the biggest producer of iron ore, sold the steel ingredient for an average $90.52 per metric ton in the first quarter. That was down 19% from a year earlier and was the lowest price that the company's ore has fetched since early 2010.

A drop had been expected, though Vale's complex pricing system exacerbated it. As a result, the company's revenue fell 11% in the first quarter to $9.5 billion, while profit tumbled 19% to $2.52 billion.

After years in which mining majors like Vale and Rio Tinto PLC struggled to keep up with torrid growth in China's appetite for commodities, a much-anticipated slowdown in the East Asian economy is finally putting the brakes on its demand for steel and, by extension, iron ore.

The World Steel Association said this month that it expects Chinese steel use to increase by 3% in 2014, less than half of last year's rate and the slowest pace in at least 15 years. China produces some 50% of all the steel in the world and needs to import hundreds of millions of tons of iron ore from Brazil and Australia to supply its mills, effectively setting global prices for the commodity.

But terrible air pollution, an effort to refocus China's economy on consumption rather than investment, and concerns about overcapacity in the steel industry have led China's government to clamp down on the sector. The timing is unfortunate for iron-ore producers, which have invested heavily in new capacity during recent years.

Up to 150 million metric tons of additional iron-ore supplies could hit the global market in 2014, with even more production coming online in following years, according to a report this month by Standard Bank.

That isn't great news for Vale, which relies on iron ore for some 70% of its revenue and nearly 90% of its cash generation. The silver lining is that the Brazilian company's mining costs are among the lowest in the industry thanks to the extraordinarily high quality of Brazilian ore, particularly in the Carajas region of the Amazon.

Vale is investing almost $20 billion to expand its mines and infrastructure at Carajas, aiming to roughly double its output there by 2018. Chief Financial Officer Luciano Siani said in a video posted to Vale's website Wednesday that the company has recently obtained permits to increase its iron-ore production at Carajas to 120 million tons in 2014, up from 105 million tons last year.

Write to Paul Kiernan at paul.kiernan@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

RIO DE JANEIRO--Brazilian mining giant Vale SA reported its lowest quarterly sales in four years Wednesday after slowing economic growth in China brought a sharp drop to iron-ore prices during the first three months of 2014.

Vale, one of the world's top three miners and the biggest producer of iron ore, sold the steel ingredient for an average $90.52 per metric ton in the first quarter. That was down 19% from a year earlier and represented the lowest price that Vale's ore has fetched since early 2010.

Global iron-ore benchmarks had indicated a drop during the quarter, though Vale's pricing system exacerbated it. As a result, the company's net revenue fell 11% in the first quarter to $9.5 billion, while profit tumbled 19% to $2.52 billion.

Mining majors like Vale, Rio Tinto PLC and BHP Billiton PLC struggled for years keep up with the torrid growth of China's appetite for commodities. But a slowdown in the East Asian economy is finally putting the brakes on its demand for steel and, by extension, iron ore.

"For the first time in these last 10 years, we're experiencing a different situation, in which supply has surpassed demand," Vale's executive director of ferrous and strategy, Jose Carlos Martins, said on a conference call, referring to higher production from the company's rivals in Australia.

He added that seasonal rains in Australia were was less intense than usual in the first quarter, further contributing to the iron-ore supply glut.

The World Steel Association said this month that it expects Chinese steel use to increase by 3% in 2014, less than half of last year's rate and the slowest pace in at least 15 years. China produces some 50% of all the steel in the world and needs to import hundreds of millions of tons of iron ore from Brazil and Australia to supply its mills, effectively setting global prices for the commodity.

But terrible air pollution, an effort to refocus China's economy on consumption rather than investment, and concerns about overcapacity in the steel industry have led China's government to clamp down on the sector. The timing is unfortunate for iron-ore producers, which have invested heavily in new capacity during recent years.

Up to 150 million metric tons of additional iron-ore supplies could hit the global market in 2014, with even more production coming online in following years, according to a report this month by Standard Bank.

That isn't great news for Vale, which relies on iron ore for some 70% of its revenue and nearly 90% of its cash generation. The silver lining is that the Brazilian company's mining costs are among the lowest in the industry thanks to the extraordinarily high quality of Brazilian ore, particularly from Vale's massive Carajas complex in the Amazon.

Many of China's domestic mines produce low-quality, high-cost iron ore, and Mr. Martins said they tend to start closing down when benchmark prices fall below $110 per ton. That de facto price floor all but guarantees the profitability of Vale's operations, the company says.

Vale also expects Chinese steel mills to start paying better premiums for ore with a high iron content in coming years as environmental regulators crack down on emissions.

To cash in on that situation, the Brazilian company is investing almost $20 billion to expand its mines and infrastructure at Carajas, aiming to roughly double output at the complex by 2018. Chief Financial Officer Luciano Siani said the company has recently obtained permits to increase its iron-ore production at Carajas to 120 million tons in 2014, up from 105 million tons last year.

Mr. Martins added that Vale expects iron-ore prices to recover somewhat in the second half of 2014 as demand picks up in China.

"While we understand the lucrative margin opportunity of the company's growth projects...we think investors would like to see a greater degree of capital discipline in the current market environment," said Garrett Nelson, a mining analyst at BB&T in Richmond, Va. "Shares would react favorably to an announcement to slow-track [Vale's] growth ambitions rather than an ostensible intent to compete with the Australians for market share."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.